capital market

Capital market is one of the most important segments of the Indian
financial system. It is the market available to the companies for
meeting their requirements of the long-term funds. It refers to all
the facilities and the institutional arrangements for borrowing and
lending funds. In other words, it is concerned with the raising of
money capital for purposes of making long-term investments. The
market consists of a number of individuals and institutions
(including the Government) that canalise the supply and demand
for long -term capital and claims on it. The demand for long term
capital comes predominantly from private sector manufacturing
industries, agriculture sector, trade and the Government agencies.
While, the supply of funds for the capital market comes largely
from individual and corporate savings, banks, insurance
companies, specialised financing agencies and the surplus of
Governments.
The Indian capital market is broadly divided into the gilt-edged
market and the industrial securities market.
The gilt-edged market refers to the market for Government and
semi-government securities, backed by the Reserve Bank of India
(RBI) . Government securities are tradeable debt instruments
issued by the Government for meeting its financial requirements.
The term gilt-edged means 'of the best quality'. This is because the
Government securities do not suffer from risk of default and are
highly liquid (as they can be easily sold in the market at their
current price). The open market operations of the RBI are also
conducted in such securities.
The industrial securities market refers to the market which deals in
equities and debentures of the corporates. It is further divided into
primary market and secondary market.
Primary market (new issue market) :- deals with 'new securities',
that is, securities which were not previously available and are
offered to the investing public for the first time. It is the market for
raising fresh capital in the form of shares and debentures. It
provides the issuing company with additional funds for starting a
new enterprise or for either expansion or diversification of an
existing one, and thus its contribution to company financing is
direct. The new offerings by the companies are made either as an
initial public offering (IPO) or rights issue.
Secondary market/ stock market (old issues market or stock
exchange) :- is the market for buying and selling securities of the
existing companies. Under this, securities are traded after being
initially offered to the public in the primary market and/or listed on
the stock exchange. The stock exchanges are the exclusive
centres for trading of securities. It is a sensitive barometer and
reflects the trends in the economy through fluctuations in the
prices of various securities. It been defined as, "a body of
individuals, whether incorporated or not, constituted for the
purpose of assisting, regulating and controlling the business of
buying, selling and dealing in securities". Listing on stock
exchanges enables the shareholders to monitor the movement of
the share prices in an effective manner. This assist them to take
prudent decisions on whether to retain their holdings or sell off or
even accumulate further. However, to list the securities on a stock
exchange, the issuing company has to go through set norms and
procedures.
Regulatory Framework
In India, the capital market is regulated by the Capital Markets
Division of the Department of Economic Affairs , Ministry of
Finance. The division is responsible for formulating the policies
related to the orderly growth and development of the securities
markets (i.e. share, debt and derivatives) as well as protecting the
interest of the investors. In particular, it is responsible for (i)
institutional reforms in the securities markets, (ii) building
regulatory and market institutions, (iii) strengthening investor
protection mechanism, and (iv) providing efficient legislative
framework for securities markets, such as Securities and
Exchange Board of India Act, 1992 (SEBI Act 1992); Securities
Contracts (Regulation) Act, 1956; and the Depositories Act, 1996 .
The division administers these legislations and the rules framed
thereunder.
The Securities and Exchange Board of India (SEBI) is the
regulatory authority established under the SEBI Act 1992, in order
to protect the interests of the investors in securities as well as
promote the development of the capital market. It involves
regulating the business in stock exchanges; supervising the
working of stock brokers, share transfer agents, merchant
bankers, underwriters, etc; as well as prohibiting unfair trade
practices in the securities market. The following departments of
SEBI take care of the activities in the secondary market:-
Market Intermediaries Registration and Supervision Department
(MIRSD) - concerned with the registration, supervision, compliance
monitoring and inspections of all market intermediaries in respect
of all segments of the markets, such as equity, equity derivatives,
debt and debt related derivatives.
Market Regulation Department (MRD) - concerned with formulation
of new policies as well as supervising the functioning and
operations (except relating to derivatives) of securities exchanges,
their subsidiaries, and market institutions such as Clearing and
settlement organizations and Depositories.
Derivatives and New Products Departments (DNPD) - concerned
with supervising trading at derivatives segments of stock
exchanges, introducing new products to be traded and consequent
policy changes.
Policy Measures and Initiatives
A number of initiatives have been undertaken by the Government,
from time to time, so as to provide financial and regulatory
reforms in the primary and secondary market segments of the
capital market. These measures broadly aim to sustain the
confidence of investors (both domestic and foreign) in the
country’s capital market.
The policy initiatives that have been undertaken in the primary
market during 2006-07 include:-
SEBI has notified the disclosures and other related requirements
for companies desirous of issuing Indian depository receipts in
India. It has been mandated that:- (i) the issuer must be listed in its
home country; (ii) it must not have been barred by any regulatory
body; and (iii) it should have a good track record of compliance of
securities market regulations.
As a condition of continuous listing, listed companies have to
maintain a minimum level of public shareholding at 25 per cent of
the total shares issued. The exemptions include:- (i) companies
which are required to maintain more than 10 per cent, but less
than 25 per cent in accordance with the Securities Contracts
(Regulation) Rules, 1957; and (ii) companies that have two crore or
more of listed shares and Rs. 1,000 crore or more of market
capitalisation.
SEBI has specified that shareholding pattern will be indicated by
listed companies under three categories, namely, 'shares held by
promoter and promoter group'; 'shares held by public' and 'shares
held by custodians and against which depository receipts have
been issued'.
In accordance with the guidelines issued by SEBI, the issuers are
required to state on the cover page of the offer document whether
they have opted for an IPO (Initial Public Offering) grading from the
rating agencies. In case the issuers opt for a grading, they are
required to disclose the grades including the unaccepted grades in
the prospectus.
SEBI has facilitated a quick and cost effective method of raising
funds, termed as 'Qualified Institutional Placement (QIP)' from the
Indian securities market by way of private placement of securities
or convertible bonds with the Qualified Institutional Buyers.
SEBI has stipulated that the benefit of ‘no lock-in’ on the pre-issue
shares of an unlisted company making an IPO, currently available
to the shares held by Venture Capital Funds (VCFs)/Foreign
Venture Capital Investors (FVCIs), shall be limited to:- (i) the shares
held by VCFs or FVCIs registered with SEBI for a period of at least
one year as on the date of filing draft prospectus with SEBI; and (ii)
the shares issued to SEBI registered VCFs/FVCIs upon conversion
of convertible instruments during the period of one year prior to the
date of filing draft prospectus with SEBI.
In order to regulate pre-issue publicity by companies which are
planning to make an issue of securities, SEBI has amended the
'Disclosure and Investor Protection Guidelines' to introduce
'Restrictions on Pre-issue Publicity'. The restrictions, inter alia,
require an issuer company to ensure that its publicity is consistent
with its past practices, does not contain projections/ estimates/
any information extraneous to the offer document filed with SEBI.
Similarly, the policy initiatives that have been undertaken in the
secondary market during 2006-07 include:-
In continuation of the comprehensive risk management system put
in place since May 2005 in T+2 rolling settlement scenario for the
cash market, the stock exchanges have been advised to update the
applicable Value at Risk (VaR) margin at least 5 times in a day by
taking the closing price of the previous day at the start of trading
and the prices at 11:00 a.m., 12:30 p.m., 2:00 p.m. and at the end
of the trading session. This has been done to align the risk
management framework across the cash and derivative markets.
In order to strengthen the ‘Know Your Client’ norms and to have
sound audit trail of the transactions in the securities market,
'Permanent Account Number (PAN)' has been made mandatory
with effect from January 1, 2007 for operating a beneficiary owner
account and for trading in the cash segment.
In order to implement the proposal on creation of a unified
platform for trading of corporate bonds, SEBI has stipulated that
the BSE Limited would set up and maintain the corporate bond
reporting platform. The reporting shall be made for all trades in
listed debt securities issued by all institutions such as banks,
public sector undertakings, municipal corporations, corporate
bodies and companies.
In line with the Government of India’s policy on foreign
investments in infrastructure companies in the Indian securities
market, the limits for foreign investment in stock exchanges,
depositories and clearing corporations, have been specified as
follows:- (i) foreign investment up to 49 per cent will be allowed in
these companies with a separate Foreign Direct Investment (FDI)
cap of 26 per cent and cap of 23 per cent on Foreign institutional
investment (FII); (ii) FDI will be allowed with specific prior approval
of Foreign Investment Promotion Board (FIPB); (iii) FII will be
allowed only through purchases in the secondary market; and (iv)
FII shall not seek and will not get representation on the board of
directors.
The application process of FII investment has been simplified and
new categories of investment (insurance and reinsurance
companies, foreign central banks, investment managers,
international organizations) have been included under FII.
Initial issue expenses and dividend distribution procedure for
mutual funds have been rationalised.
Mutual funds have been permitted to introduce Gold Exchange
Traded Funds.
In the Government securities market, the RBI has ceased to
participate in primary issues of Central Government securities, in
line with the provisions of Fiscal Responsibility and Budget
Management Act (FRBM Act).
Foreign institutional investors have been allowed to invest in
security receipts.
Thus, the capital market plays a vital role in fostering economic
growth of the country, as it augments the quantities of real
savings; increases the net capital inflow from abroad; raises the
productivity of investments by improving allocation of investible
funds; and reduces the cost of capital in the economy